Why It's Too Early To Call A Bottom In Home Prices

There's been a lot of chatter about a recovery in home prices
after the closely watched S&P Case-Shiller home price index posted gains in
February and March.

But a new report from Beata Caranci, deputy chief economist at
TD
Bank Group, says it isn't time to celebrate just yet. Housing
is after all "inherently local and price momentum varies greatly
from market to market".

On the demand side home prices are impacted by the pace of job
growth and foreign demand. On the supply side they are impacted
in large part by the flow of foreclosures onto the market.

To better understand how these supply side forces impact home
prices, Caranci looks at the experience in Florida and Atlanta.

A foreclosure backlog

Florida which continues to be "ground zero" for delinquent and
foreclosed homes and has 14.3 percent of its mortgages in
foreclosure has seen home prices appreciate 4.7 percent in the
past year. This is because home prices aren't driven by "absolute
amount of foreclosures backlogged in a court system or review
process," according to Caranci. "Rather, it is the rate at which
they trickle onto the market and, thus, their share of total
sales."

The share of sales of foreclosed homes in Florida has fallen
nearly 15 percentage points in the past year, and this has helped
support home prices. But because the long foreclosure process is
creating a backlog of foreclosures, it raises the risk that a
rush of property prices would lower prices again.

The Atlanta housing market is the perfect example of what could
go wrong when the foreclosure process is lengthy. After
weathering the initial downtrend in home prices relatively well,
home prices in the Atlanta area are down 18 percent year-on-year,
according to Caranci. "This is the greatest decline of any metro
area that Case-Shiller reports."

In judicial states, lengthy court proceedings have restricted the
flow of foreclosure inventory onto the market. This means
distressed sales could easily rise in states like New York and
New Jersey building downward pressure on prices.

What Arizona's doing right

Arizona, another state which had been a hotbed of foreclosure
activity, has been getting the right mix of foreclosure supply
and price impacts, according to Caranci.

Arizona allows for in-court and out-of-court foreclosures (but is
classified as a non-judicial state), and it has steadily been
clearing its shadow market. The Grand Canyon state has seen a 10
percentage point drop in foreclosed sales in the past year
coinciding with a steady decline in the backlog of foreclosure
properties.

In the first quarter of 2012, its share of foreclosure mortgages
was 3.6 percent of its total market, down from over 6 percent at
the peak.

It's only a matter of time

While the flow of distressed properties is important for home
prices in the short-term, Caranci warns that in the longer-term
the total amount of distressed properties can pressure home
prices:

"It is the flow of distressed properties into the market that
matters most for prices in the near term rather than the
outstanding stock in backlog. But, the latter materially raises
the risk that up- ward momentum in prices will eventually stall
or reverse course."

The bottom-line, "supply issues remain a wild card in the housing
outlook".